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Mechanisms to Lower the Prices of Gas

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EU Joint Gas Purchase Platform Kicks Off

The EU Energy Platform to buy gas jointly is now active.  The platform launched its first call for companies interested in buying gas together, through a service called AggregateEU.

It is a true milestone for this EU initiative.

1. The joint-purchasing mechanism

Council Regulation (EU) 2022/2576 of December 19, 2022 (the “Solidarity Regulation”) brings together European gas buyers to obtain better prices, also to benefit final consumers. In the Council’s view, better coordination of gas purchases, reliable price benchmarks and gas exchanges across borders enhance solidarity among gas users (for further details, see Cleary Blog).

Joint gas purchasing follows two steps:

  1. EU demand aggregation: a service provider collects the companies’ requests for gas. Member States must ensure that at least one sixth of their national storage filling requirements is submitted to it (see here on EU minimum filling storage obligation).  
  2. Joint purchase: once gas suppliers are chosen, companies can conclude purchasing contracts with them.

 

An EU mechanism – called AggregateEU – carries out the two steps at the European level. AggregateEU matches gas buyers and sellers and is managed by Prisma European Capacity Platform GmbH (“Prisma”), a service provider hired by the Commission.

2. The first call for buyers

On April 25, 2023, Prisma launched the first call for gas buyers.

Participants had to:

  • register with Prisma and subscribe to AggregateEU by April 20, 2023;
  • specify (i) type (i.e. LNG or National Balancing Point) and (ii) date of delivery.

Demands for gas could be placed until May 2. The tender to find gas suppliers for the entire amount needed should last about two weeks. Prisma will select the best supply offers.

Any company established in the EU or in the Contracting Parties of the Energy Community (Albania, Bosnia and Herzegovina, Kosovo, North Macedonia, Georgia, Moldova, Montenegro, Serbia and Ukraine) can participate as a buyer.

Suppliers may also come from outside the EU (except those sanctioned by the EU, mostly Russian gas suppliers). They must register on the Prisma platform. Subsidiaries of the same group cannot be both sellers and buyers in the same tender on AggregateEU.

New tenders should take place every two months over the next year. Registration to AggregateEU is open. So far, 76 companies have joined, with more in the wings.

3. Joint purchase

Participants can enter into contracts with the selected supplier. Negotiations take place outside AggregateEU.

Single-purchase

Big buyers can negotiate contracts with suppliers on their own. They should:

  • request at least (i) 300 GW/h in LNG tenders; and (ii) 5 GW/h in National Balancing Point/Virtual Trading Point tenders;
  • be well equipped to transport gas and perform negotiations;
  • be creditworthy.

Cooperation

Other companies may cooperate following two models:

  • “Agents/Shipper-on-Behalf” – under this model, buyers entrust another company (likely, a mid-streamer) to act on their behalf in providing certain services, like reserving a slot on an LNG terminal, transporting from a ship to the point of consumption, storing or balancing services. The signing of the contract will occur between every individual buyer and the gas supplier; or
  • “Central Buyers” – under this model, buyers could ask other companies (likely larger gas companies) to negotiate and sign the contract with the gas suppliers.

A list of companies which have agreed to offer such services to Prisma is available on this website. 

Competition risks

Buyers, sellers, and agents must comply with competition law. The Commission has offered to provide informal guidance to interested companies on a case-by-case basis. It has also set out some general principles:

  • commercially sensitive information should be (i) exchanged only bilaterally between the Agents/Shipper-on-behalf or Central Buyer and their individual customers, and (ii) limited to what is necessary to negotiate and carry out the gas purchase agreements;
  • if the Agent/Shipper-on-Behalf or Central Buyer operate in the same market as their customer, firewalls must limit access to commercially sensitive information only to staff dedicated to this function;
  • Central Buyers should not derive rents from gas procured through AggregateEU. They are allowed to earn rent from ancillary services.

The EU agrees on level of price caps for Russian petroleum products

On February 4, 2023, the Council adopted two additional price caps for Russian petroleum products, after having previously capped the price of crude oil at $60 in December 3, 2022. After a transitional period of 55 days, the price of petroleum products traded at a discount to crude (like fuel oil and naphta) is capped at $45 per barrel, while the price of petroleum products traded at a premium to crude (like diesel) is capped at $100 per barrel.

Council Decision (CFSP) 2022/1909 bans  maritime transport and the provision of finance, financial assistance, brokering services and technical assistance to the maritime transport, of Russian crude oil and petroleum products to third countries, unless the above price caps are respected. Imports of Russian crude and petroleum products are already banned wholesale in the EU under previous sanctions packages. 

The caps can be reviewed every two months.

Council adopts Regulation to cap gas prices at €180/MWh

On December 22, 2022, the Council adopted Council Regulation (EU) 2022/2578 establishing a temporary market correction mechanism to protect Union citizens and the economy against excessively high gas prices.

The market correction mechanism (MCM) entails a price safety ceiling for gas transactions on virtual gas trading platforms in the EU will be applied if and when gas prices reach exceptional levels and diverge significantly from LNG prices.

Price cap conditions

The MCM activates if the month-ahead (or front-month) TTF prices (i) exceed €180/MWh for three consecutive days while (ii) being €35 above an LNG reference price to be set by ACER.  While active, the price of covered natural gas futures is capped dynamically on a daily basis (so called, dynamic bidding limit), at the sum of (a) the LNG reference price and (b) €35.  For instance, if the price cap mechanism is active and the LNG reference price is €165, TTF prices will be capped at €200 (165+35).  If the LNG reference price drops below €145, the Regulation provides that the dynamic bidding limit shall remain at €180. In other terms, the ceiling cannot be lower than €180. 

The dynamic bidding limit shall apply for a minimum of 20 working days. Afterwards, it is deactivated  if the LNG reference price falls below €145 for three consecutive working days. The dynamic bidding limit can also be suspended by an implementing decision of the Commission, if it identifies manifest risks that the price cap jeopardises security of gas supply, intra-EU gas flows or financial stability.

TTF derivatives are covered by the cap, and the Commission is empowered to extend the cap to other gas derivatives through an implementing regulation, to be adopted by March 31, 2022.  

Practical impact and competition concerns:

The agreed price ceiling is €100 lower than the Commission’s first proposal to cap prices at €275 when that ceiling was exceeded for ten days. If the agreed price ceiling had been in force the past year, prices would have been capped at €180 for about 2 months mainly in August and September. By contrast, the Commission’s proposed €275 price cap would not have been triggered.

Recital 24 of the Regulation expresses the concern that the dynamic bidding limit may lead to collusion amongst traders between gas suppliers or traders. To avoid this, it encourages financial regulators ACER and competition authorities to observe markets “particularly carefully” when the mechanism is activated.

Next steps:

The regulation enters into force on February 1, 2023, and the price cap on February 15, 2023.  The regulation is temporary and will apply for one year.

The legal basis for this Regulation is Article 122(1) of the TFEU, a treaty provision that can only be used in cases of serious hardship and in compliance with the principle of  solidarity between Member States (for further details, see CLEARY ALERT MEMO: Article 122 TFEU as a Legal Basis for Energy Emergency Measures). The above additional temporary emergency instruments complement the current regulatory framework for security of gas supply, including Regulation (EU) 2017/1938 on security of gas supply, designed to address short-term supply disruptions (for further details, see CLEARY ALERT MEMO: European Council Regulation to Address High Energy Prices).

Council adopts a broad range of measures to address high gas prices in the EU and ensure security of supply.

On December 19, 2022, the Council adopted Council Regulation (EU) 2022/2576, enhancing solidarity through better coordination of gas purchases, reliable price benchmarks and exchanges of gas across borders.

The Regulation intends to provide temporary measures to mitigate the tremendous impact on the price for gas that the war in Ukraine has created.  The proposed Regulation focuses on enhanced solidarity and coordinated schemes between the Member States, to address the fragile equilibrium between demand and supply, and ensuring security of gas supply. The Commission proposal makes it clear that, notwithstanding the mechanisms, compliance with competition rules still need to be ensured. The main elements of the Regulation are the following:

  • Coordination of gas purchases. The Regulation introduces a form of coordination of gas purchases through a two-step process:

First, EU gas demand aggregation: gas demand is aggregated through a service provider, which is contracted by the Commission on the basis of a pre-determined set of criteria. Demand aggregation is mandatory for 15% of national storage filling requirements (see here on EU minimum filling storage obligation).

Second, joint purchase of gas: on a voluntary basis, companies may decide to form a gas purchasing consortium in order to enter into contracts with the supplier. In particular, gas-purchasers “may, on a transparent basis, coordinate elements of the conditions of the purchase contract or use joint purchase contracts in order to achieve better conditions with their suppliers, provided they comply with [EU competition rules].”  The regulation envisages that the Commission may support the design of the consortium, issuing a decision under Article 11 of Regulation (EC) 1/2003 finding the consortium does not raise competition concerns under Article 101 and 102 TFEU.  

  • Efficient use of pipelines and LNG terminals. An increase of LNG supplies also causes new routes to become more relevant than the past predominant East-West direction of pipeline flows. This could cause congestion (contractual and physical) of the existing pipelines and the EU LNG terminals. Current mechanisms to solve contractual congestion might not provide a timely answer. For this reason, the Regulation includes a definition of underutilisation “as the situation where a network user used or offered on the market less than on average 80% of the booked firm capacity in the last 30 days” and a duty for transmission system operators to publish unutilized capacity as available capacity for the next monthly auction.
  • Price volatility. The Regulation imposes on trading platforms the obligation to establish a new temporary mechanism to manage intraday volatility, designed to limit large fluctuations in the prices of electricity and gas derivative contracts within the same trading day (focusing on front-month contracts). This mechanism compliment so-called “circuit breakers” put in place by trading platforms and will be supervised by the European Securities and Market Authority (ESMA).
  • LNG gas prices. The Regulation makes ACER (the Agency for the Cooperation of Energy Regulators) responsible for developing a daily LNG gas price benchmark.
  • Gas emergency measures. The Regulation allows Member States to adopt specific measures in case of a gas emergency.  Member States are exceptionally empowered to take measures to reduce the non-essential gas consumption of households (which are “protected consumers”) in a crisis.  Member States may only request gas from another Member State through a “solidarity measure” where they have not been able to cover essential gas use (essential household needs and gas volume needed for electricity security of supply) in their territory.  The Regulation also extends the obligation to provide solidarity measures to Member States with LNG facilities (and not only those directly connected to the Member States requesting solidarity), provided the necessary capacity in the relevant infrastructure, including the LNG vessels and carriers, is available.

The legal basis for this Regulation is Article 122(1) of the TFEU, a treaty provision that can only be used in cases of serious hardship and in compliance with the principle of  solidarity between Member States (for further details, see CLEARY ALERT MEMO: Article 122 TFEU as a Legal Basis for Energy Emergency Measures). The above additional temporary emergency instruments complement the current regulatory framework for security of gas supply, including Regulation (EU) 2017/1938 on security of gas supply, designed to address short-term supply disruptions (for further details, see CLEARY ALERT MEMO: European Council Regulation to Address High Energy Prices).

Links to EU regulations/statements and news stories on possible EU price cap on Russian Gas:

January 2023:

December 2022:

November 2022:

October 2022:

September 2022:

August 2022: